Europe's poor relations on the Mediterranean are being gradually drawn into the process of enlargement through the Barcelona process, but there are qualms about ceding economic independence in return for the questionable benefits of free trade. Although most of the rich neighbours in the north have accepted the invitation to join the EU club, they have similar worries about the hegemonising effects of full membership. Finland is the only Scandinavian country to embrace monetary union, while Norway has turned its back on the European experiment. Denmark, which took over the EU presidency from Sweden on 27 June, has yet to discard the krone and become a full citizen of Euroland.

'I am almost certain that Denmark will adopt the euro at some point in the next few years, but our referendum was held too early, when Danes were not sure of the benefits,' says Christian Wittenkamp of the Confederation of Danish Industries. 'What is interesting is that the Arabs I have talked to on trade visits have been very curious about Denmark's presidency of the EU, especially on the question of the accession of other European states.'

For simple reasons of geography Scandinavian countries have easy access to the Baltic states, eastern Europe's aspirant EU members and one of the fastest-growing emerging markets in the world. The forms of bilateral trade have not always been legitimate ones. 'In the winter when the sea freezes over you can skate from here to Estonia, that's how close it is,' says a resident of Helsinki. 'There used to be quite a lot of smuggling before the end of Soviet Russia, but the coastguards are very thorough now and contraband - and people - are usually stopped.' Another promising market for Scandinavian exports, the Middle East presents similar political problems, even though it is over a thousand miles away.

'Since our membership of the EU, the Middle East and North Africa has become a neighbouring area for us,' says Hans Ottelin of Finland's Foreign Affairs Ministry. 'Both as a trade partner, but also in the form of several dangers such as immigration - which has become very difficult to control - narcotics, and international crime.'

Unlike most of their European peers, Scandinavian societies enjoy exceptionally low crime rates, and until recently saw few of the national security anxieties that broke out in other countries after 11 September. Sweden received an unexpected taste of the new world disorder on 30 August this year, when airport police in Stockholm arrested an armed man as he attempted to board a plane bound for the UK. No aircraft originating in Sweden has ever been highjacked. The ethnicity of the suspected terrorist, a Swedish national of Tunisian origin, will almost certainly fan the flames of a debate that has raged across the US and Western Europe in the past 12 months, but is only now beginning to singe the fringes of Nordic politics.

'We have quite a lot of immigrants already from the Middle East, who are doing quite a lot to promote cultural understanding here,' says Johann Hagloff of the Swedish Trade Council. 'But there is an ongoing discussion about labour migration in the run-up to the next election. Thousands of workers will be needed in the next 15 years, but many of the immigrants here from the Baltic states are themselves unemployed. The arguments for and against are quite valid, but then you get involved in political ideology and the reasoning becomes confused.'

The atmosphere is changing in the traditionally liberal, left-leaning Scandinavian societies. A closer relationship with the rest of Europe, where right-wing candidates have swept to power in countries like France and the Netherlands, may be to blame. In both Norway and Denmark, left-wing governments have been ousted by voters in the last year.

Sweden's Social Democratic Party (SDP) is fighting a rearguard action in the run-up to 15 September, when voters will decide whether to keep the party that has governed them for all but nine of the past 70 years. One incentive to retain the SDP is its dedication to the lavish welfare state that makes quality of life in Sweden second only to that of its oil-rich neighbour Norway, according to the UN's human development index. 'It is a close-run thing,' says one Stockholm-based analyst. 'The SDP is easily the single biggest party and it is trying to find political partners for a consensus government, but the polls suggest that the opposition has retained its individuality. There are many factors which could swing the vote.'

One of those factors is the performance of the economy. Sweden's GDP has lagged behind the average EU annual growth rate of 2.6 per cent in the past decade. While the austerity drive led by Prime Minister Goran Perrson since the 1990s has successfully turned a budget deficit into a surplus and brought down long-term interest rates, companies and consumers alike are feeling the pinch. Unemployment is rising and high taxes have driven a number of companies to relocate to other parts of Europe. Globalisation has also taken its toll, as companies including Volvo Cars, Saab and the pharmaceutical firm Astra have been snapped up by foreign buyers.

Sweden's neighbours face similar problems. A fall in Norwegian exports and declining investment levels suggest high wage inflation and a strengthening krone have blunted the competitive edge of local companies. High labour costs also affect Danish industry, although the economy has coasted along with moderate growth since the beginning of last year. Finland, meanwhile, is struggling to keep its head above water. 'The Finnish economy experienced dismal growth in the first quarter of 2002, with -1.9 per cent year-on-year growth, thus meeting the official requirements of being called an economy in recession,' says a report from the Copenhagen-based LB Kiel Group.

These home-grown difficulties are compounded by one significant external factor: the downturn in the global IT and telecoms markets. Tremors from the recent economic turbulence have shaken Europe's telecoms valley, where Ericsson, the world's largest supplier of mobile networks, has announced plans to cut 45,000 jobs. However, analysts say the brunt will be borne by the home market. One region which continues to offer IT companies room for expansion is the Middle East, where a major $826 million order for the expansion of Saudi Arabia's GSM network continues to keep both Ericsson and Nokia occupied. Ericsson is now bidding for the equipment supply contract for Egypt's third GSM network, while other opportunities in the region include expansion and upgrade programmes launched by Kuwait and Iran this year.